India's bankruptcy overhaul tempts distressed investors

Private equity firms are on a war footing after India overhauled its byzantine bankruptcy procedures.

Regulatory reform in India to remove red tape has reinvigorated interest from private-equity firms, driven by a sweeping transformation launched by Prime Minister Narendra Modi in the past two years, investors said in a conference on Wednesday.

For investors in private debt and special situations, more investment opportunities will emerge in the next few years, after the Modi administration introduced its first-ever bankruptcy law in 2016 to speed up the liquidation process and help prevent the accumulation of bad debt which would eventually hinder the credit cycle and economic growth.

Other action has been taken too. Last year, the Reserve Bank of India, the central bank, took 12 of the country’s largest loan defaulters to court, in a landmark move demonstrating its ambition to speed up the debt collection process. The 12 companies accounted for about Rs2 trillion ($31 billion) of the country’s non-performing loans, or roughly a quarter of its bad debt.

“The whole landscape in India has completely changed in the last two years,” said Edwin Wong, chief investment officer at SSG Capital Management, a $4.5 billion private equity firm based in Hong Kong. “With the new bankruptcy law taking place, there is more balance between borrowers and creditors,” he said during the HKVCA Asia Private Equity Forum 2018. 

Speaking during the same conference, Brad Landes, a partner at private-equity firm ADV Partners, said the regulatory reform in India is an important filip for market optimism.

“It used to be the creditors sitting under the nose of banks for over 10 years, but things have changed given the new legislation,” said Landes, who has invested in India market for 14 years. “Whereas now it is kinda like solving a problem and get on a train, with Modi moving forward.”

Investing in so-called special situations can involve a number of corporate actions, including tender offers, mergers and acquisitions and bankruptcy proceedings.

Private debt managers in Asia in some cases provide credit to small business owners, taking on more risk than would be the case if they invested in public bonds issued by large companies but potentially earning higher returns.

“It is a great opportunity to invest in India right now,” said Wong of SSG. “That’s in contrast with a few years ago when investors were badly burned by their investments in India.”

Founded by three Lehman executives in 2009, SSG raised $2.5 billion of new capital last year to put to work in India’s distressed assets and non-performing loans.

Besides the improving regulatory landscape, investors also identify the lack of transparency in Indian markets as crucial to generating higher returns.

“We are not dealing in the US where we push up to walls and remedies, and certainties of outcomes,” said Landes, a former trader at JPMorgan. “In developing Asia, we are in the middle of that… inefficiency and opaqueness are kind of the characteristics of these markets today."

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